Nov 26, 2020 in Business



Merger in Global Aviation Industry: Literature Review

Ashley Ivory

DB 9950

Merger in Global Aviation Industry: Literature Review

This review is a part of our research titled Merger in global aviation industry. We will now briefly summarize the main findings of the current active research on the topic for the last few years.

The reference material studied covers a broad range of detailed topics that will be used in our research. The cited works can be structured into two wide categories contributing to the corresponding sets of research questions. These are the implications on the macroeconomic level, market and regulation, and the resulting impact on performance of companies and effects for consumers.

Market Effects and Implications for Regulator

Competitiveness and Other Relevant Market Effects

The questions of market effects have been studied in a number of research works for the last five years. One of the most investigated topics is the study of influences on competitiveness. The paper by Bilotkach (2011) examines a 2005 merger of US Airways and America West Airlines. He claims that consolidation may lead to a higher extent of multi-market contacts throughout the airline industry causing a distinct impact on the frequency of service and softening the competition between players involved, at least in the short run.

The recent research by Mudde and Sopariwala (2014) further deepens the analysis of the same merger case. It presents the merger in more detail and analyzes specifics, consequences, and approach to measure the effects of the deal between the higher-cost and low-cost models. They consider impact on firm size, unit pricing and costs, efficiency, and capacity for the combining airlines.

Bamberger, Carlton, and Neumann (2001) investigate the effects of airline alliances for the customers. They research two alliances of the mid-90s: Continental Airlines with America West Airlines, Northwest Airlines with Alaska Airlines. The authors present the factors for and against the competition and build a statistical model to measure the impact of the alliances. They justify the customer benefits, namely decrease in rates and growth of air traffic, and find that the level of influence depends on the competition level prior to the deal.

Questions of Regulation

As the competitiveness topic is closely related to the problems of state regulation, we studied a number of research articles focused on this aspect of airline mergers.

Borenstein and Rose (2014) performed a comprehensive review of the consequences of regulation and reforms in the passenger airline industry. Moreover, they addressed the phenomena resulting from introduction of the national deregulation, such as changes in price structures, network and market structure, competition, and level of service. While building a positive ground for deregulation policies, they also considered ambiguous side-effects of the industry in transition, such as issues regarding sustainability of competition, profit volatility, implications of investment shortfalls in infrastructure for congestion.

Ghosal and Sokol (2013) performed a general study of regulation policies in mergers and acquisitions, which formed a useful theoretical framework for our research of airline transportation industry. They considered regulations concerning environmental issues, financial reporting, and antitrust regulations, linking the quality of information about the target company to the compliance with the M&A deal.

Ashenfelter, Hosken, and Weinberg (2009) turned to the examination of merger effects in relation to improving the regulatory policies. They described the empirical evidence which can be used, when analyzed in a retrospective, to enrich the common sources of information, namely expert and customer testimony as well as corporate documentation. This would enable the regulator to improve the decision-making in antitrust enforcement and establish effective horizontal merger policy. The approaches discussed in the paper included the price simulation, demand models, and analysis of stock markets.

Boudier and Lochard (2013) investigated the macroeconomic effects of cross-border merger and acquisitions through the cases of OECD countries, specifically the industries with high level of government regulation. They confirmed the positive effect of inward M&As in services, which resulted in decreased entry costs and increase in investment opportunities, and presented a more ambiguous impact on outward M&As, which depended on the initial level of regulation.

A similar topic of cross-border ownership is discussed in a research by Forsyth, Niemeier, and Wolf (2011). Namely, they investigate transaction cost factors and industry indicators to define international alliance strategies referred to as multi-airport airlines.

Airline Performance Indicators and Implications for Consumers

Kwoka and Shumilkina (2008) used the case of USAir and Piedmont Airlines to explore several years of statistical data and investigate the negative merger effects. They analyzed the alliances between multi-industrial players and considered the potential decrease of competition in other industry. They presented significant and statistically robust effects of the merger for the non-incumbent party, compared to the situation prior to the merger when the companies were competing.

A model-based approach is suggested also by Martin (2011), who presents a simulation model to evaluate and forecast potential effects of mergers. Namely, the author builds price and demand simulation in the merger case of major players based on the factors of consumer welfare, price, and airline profit. An efficient model of the legacy hub-and-spoke system is included in the analysis, while some external factors such as labor union conditions or negotiation scenarios remain out of scope.

Wojahn (2012), relying on his previous study of the same year, considers the phenomena of airline industry that have impact on decreasing profits. Specifically, the scholar discusses over-capacity and over-investment issues, which lead to attrition wars and can cause deterioration of service levels. He suggests that these effects can be limited by introducing less intense product market competition and closer alignment of interests of managers and owners.

Zhang and Round (2008), among other issues, examine the regulatory policy in China, which is aimed at stimulating concentration in the industry, for example, via liberal regulation of foreign capital as oppose to the USA. This is related to the low profits of airlines which were facing significant profit loss due to intensive price wars. They analyze the possible effect for consumers in terms of changes in pricing.

Odeck (2008) focuses on the effects of transportation mergers on the increase of service efficiency and thus the productivity. The research is based on Norwegian data and performance indexes.

In his article, Chengery (2012) examines recent US airline mergers: American Airlines with US Airways, Trans World Airlines with AMR Corp./Fort Worth, US Airways with America West, Delta Airlines with Northwest airlines, United Airlines with Continental Airlines, and analyzes the main factors that caused these decisions as well as implications for the market players and consumers. He defines profit optimization (cutting fat) and the need to strengthen the industry as the main reasons that drive the deregulation processes and subsequent mergers, which started in 1980s and experienced a long line of airline mergers shortly before 9/11 events. He argues about the supposedly positive effects of todays consolidation processes for mass market customers, mentioning shrinking hubs, reduced flight capacity, and potentially higher fares.

Lazzarini (2004) analyzes cases of airline multi-partner alliances, or constellations, and confirms the great operational benefits of the formal partnerships with the players exploiting large aggregate traffic. He also draws interesting conclusion related to implicit clusters with significant bilateral ties, namely that they also enjoy benefits of increased operational performance, even if the partners are not formally connected to each other.

Luo (2014) presents a significant result related to the main case of our study, the merger of Delta and Northwest Airlines. Namely, the evidence shows that the change of prices, which were compared prior to and after the merger, was not substantial. This result is attributed to the finding that the impact of changes in the merger of low-cost carriers is larger compared to a smaller effect in the situation of competing legacy (large) airlines. In our research, we will present the detailed analysis or pre- and post-merger data of this case.

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